Waters still muddied on foreign profits

You might have thought it was safe to go back into the water of generating
foreign profits after the pre-Budget report, but frustration and confusion still
vexes those grappling with the tax implication of either setting up, or taking a
share holding in, a foreign company.

The dismay revolves around the controlled foreign companies regime which
governs the taxation of profits generated abroad.

After much discussion, argument and the departure of large companies for
overseas bases, the chancellor announced in the pre-Budget report (PBR) that
dividends from controlled foreign companies would be exempt from taxation
whatever the size of the holding.

But what remains unclear is just how companies will qualify for the
exemption. The government promised draft legislation before the end of the year,
but as Accountancy Age went to press nothing had been made available.

There is also obvious irritation at how much longer it will take to settle
the rules. After all some companies have already left to set up bases in Ireland
and Luxembourg, while other big names have threatened to pack their bags.

Chris Morgan, head of international corporate tax at KPMG, said: ‘The risk
remains that companies thinking of leaving the UK will not wait for a further
one or two years to see whether the rules can be adequately modernised.’

At question are three tests within the CFC regime ­ the exemption test, what
qualifies for exemption; the motive test, your foreign company cannot only be
about reducing your tax burden; and the last is your foreign company based in
country outside the

Experts believe the existing rules do not allow enough flexibility for
multinational companies. But the government also wants to ensure the rules are
not abused for tax avoidance, as the PBR statement in November made clear. The
question everyone is pondering is how this objective will affect the rewriting
of the qualifying tests.

It now looks likely the government will release some details in the early
part of this year. But it could still take until 2010/11 before all questions
are resolved.

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